Public Broadcasting's Now with David Brancaccio ran a fascinating program last
Friday about the insurance industry and their performance in
the wake of certain disasters such as the San Diego wildfire
in California four years ago.
PBS, relying heavily on an article in the September issue of Bloomberg Market
Magazine entitled The Insurance Hoax by David Dietz and Darrell Preston,
devoted a half hour to its thesis that some major insurance companies, notably
State Farm and Allstate, have gone to great lengths to shortchange customers
in order to build their stock values and reward stockholders.
The Bloomberg article leads off with a story about a State Farm customer who
was visited by a company rep who informed her, after the largest wildfire in
California history, that she would receive only $184,000 of the estimated $306,000
cost of replacing her home.
Thus, the authors conclude, this customer learned a secret
about the insurance industry; "When there's a disaster, the companies (that)
homeowners count on to protect them from financial ruin routinely pay less than
what policies promise," sometimes only 30 to 60 percent of the cost of rebuilding,
"even when carriers assure homeowners they're fully covered, thousands of complaints
with state insurance departments and civil court cases show."
PBS interviewed homeowners who said that their coverage had been switched by
their company from "full replacement" to "extended
replacement" coverage before the fire. When they questioned their agents
they were told that extended replacement was much better than full replacement
"yet, once claims were submitted, they were offered settlements that came nowhere
near covering their rebuilding costs."
Bloomberg says that, by reducing what it pays out on losses, companies have
achieved huge profits over the last 12 years. Casualty insurers reported record
profits last year - $73 billion, 49 percent higher than in 2005, and
this in the wake of Hurricane Katrina.
Property owners, who pay more than $50 billion a year in insurance premiums,
find that their carriers systematically deny and reduce payment on claims and
change policy coverage with no clear explanation. They ignore or alter engineering
reports and sometimes ask their adjusters to lie to customers Bloomberg said,
citing as sources court records and interviews with former employees and state
California's Lieutenant Governor John Garamendi served for eight years
as the state's insurance commission where he imposed $18.4 million in
fines against carriers for mistreating consumers. He is quoted as saying that
"the first commandment of insurance is 'Thou shalt pay as little
and as late as possible.'"
It was in the 1990's, following Hurricane Hugo which cost the industry
$4.2 billion in claims that the industry began looking for ways to increase
profits by "streamlining" claims handling. Key to this streamlining
was a New York State consulting firm, McKinsey & Co. McKinsey worked for
Allstate Insurance, developing methods for the company to pay out less in claims.
Allstate has fought for years to keep the 13,000 pages of documents produced
for it by McKinsey from becoming public, and while under orders from two different
courts to produce the information, continues to fight disclosure. An attorney
representing claimants got his hands on some of the documents among which were
PowerPoint slides which advised Allstate, in a take off on the company's
decades old self-description as "the Good Hands People" to use "Good
Hands or Boxing Gloves," by first making a low offer on a claim and if
that offer is accepted, the customer is treated well; if the customer protests
or hires an attorney, Allstate should fight back."
Another slide displays an alligator with the caption "Sit and Wait."
The slide says Allstate can discourage claimants by delaying settlements and
stalling legal proceedings. One claimant told Brancaccio that his insurance
company demanded not only invoices for such routine claims as for debris disposal
but then insisted on testimony from the contractor who hauled the debris - testimony
that was scheduled and postponed, scheduled and postponed in an attempt to wear
down not only the claimant but his witnesses.
McKinsey was apparently good for Allstate's bottom line. The company's
profits rose 140 percent to 4.99 billion between 1996 and 2006 while the company
dropped the percentage of premium income spent on claim payouts from 79 percent
in 1996 to 58 percent last year. This loss ratio changes each year based on
events such as natural disasters but the general trend since Allstate hired
McKinsey has been down.
And Allstate's stock has jumped 400 percent between June 3, 1993, the
day Allstate went public and July 11 this year while the Standard & Poor's
500 Index tripled. State Farm's profits doubled in the 10 year period
ended in 2006.
Several months ago we detailed
how many insurance companies were reducing their exposure to risk (and improving
their bottom lines) by raising premiums - some times astronomically - and thereby
forcing homeowners to drop coverage in disaster prone areas
or by withdrawing from the insurance market altogether in riskier areas. Premiums
have also skyrocketed or policies cancelled for homeowners in less risky areas
who have submitted even one substantial claim.
Companies have invested in computer programs that estimate the cost of rebuilding
a home or of treating people injured in automobile accidents, including factoring
in pain and suffering or permanent impairment. Lawsuits have asserted that insurers
have manipulated these programs to pay out as little as possible and there have
been allegations that some companies have pressured or rewarded adjusters who
have keep claim payouts down by lying about coverage or denying claims.
Companies have even been accused of changing policies retroactively. One case
in New Hampshire was found in favor of the plaintiff against Hartford Financial
Services Group which, it is alleged, deleted the replacement cost portion of
a homeowner's policy on a mansion which was destroyed by fire.
Of course much of the country is familiar with the on-going battle
in the Gulf States over whether the homes destroyed by Hurricane Katrina were
the result of wind or flood water. If wind, the insurance company loses; if
flood waters then the losses are laid off on the federally sponsored flood insurance
program for those homeowners who have such coverage or on the homeowners themselves
if they do not.
Are Allstate and State Farm alone in using McKinsey-like tactics? And where
are state and federal governments in all of this? Maybe, just maybe insurers
have overplayed their hand because of a Katrina victim named Trent Lott. Also
the companies have had plenty to say about the story and the television program
in the last few days. To be continued...